By Nkiruka Nnorom
The drive by the federal government (FG) to raise its revenue this year to N5.08 trillion, is now threatened by sustained inflationary pressure.
The government had hoped to ramp up the revenue target with the increase in the Value Added Tax, VAT, rate to 7.5 percent, but investment experts at PricewaterhouseCoopers, PwC, have said the government revenue will come under pressure arising from inflation, trade deficit and waning foreign investor confidence.
They also attributed the adverse turn of fortune to the prolonged impact of the Coronavirus, COVID-19, pandemic.
In their latest economic report tagged: “Demand and Supply Shock from COVID-19 keep Inflation Higher for Longer”, PwC analysts said the lower revenue generation would result from low tax generation, especially from Company Income Tax (CIT) and VAT as businesses now suffer lower sales, especially for non-essential items, on the back of the COVID-19 pandemic.
Besides, they said the government faces the risk to budget implementation due to high and uncertain input costs.
The report stated: “Barring a second wave of the pandemic, which could further threaten outlook for global economic growth, coupled with the absence of major shocks to food supply in Nigeria, inflation outlook for the rest of the year could be influenced by two factors.
“Firstly, the elevated base effect, and secondly, waning household income. The first factor is likely to have a greater impact. Hence, we estimate that headline inflation will average 12.2 percent in 2020 compared to 11.4 percent in 2019. This could likely impact the monetary policy objective of price stability,” the report said.
Consequently, PwC projected that the high inflationary trend would lead to low capital formation, high cost of inputs and contracting profit margin/deeper losses for businesses, thereby fuelling the risk of reduced revenue generation for the government.
The firm said there is the need for the government to make deliberate effort to provide adequate support to the agricultural and food processing sectors as well as ensure a functional and effective price regulatory system in order to put a lid to the consistent upward commodity prices.
The firm advised the government to provide adequate supply-chain mechanisms to facilitate unrestricted supply of food and provision of other essential items and massive support to the real sector of the economy in form of adequate funding and inclusive tax incentives.